International Forestry Review Vol.15(4), 2013
499
Financing smallholder timber planting in Indonesia: mismatches between loan scheme attributes and smallholder
borrowing characteristics
B. NUGROHO1, A. DERMAWAN2 and L. PUTZEL2
1
2
Faculty of Forestry, Bogor Agricultural University, Jl. Lingkar Akademik Kampus, IPB Dramaga, Bogor 16680, Indonesia
Center for International Forestry Research, Jalan CIFOR, Situ Gede, Bogor Barat 16115/P.O. Box 0113 BOCBD, Bogor, Indonesia
Email: bramasto2001@yahoo.co.id, a.dermawan@cgiar.org, and l.putzel@cgiar.org
SUMMARY
Over the past decade, many tropical country governments have promoted smallholder timber planting. In Indonesia, the government introduced
a program aimed at establishing 5.4 million hectares of smallholder timber plantations by 2016. In order to support the program, the Government of Indonesia provides access to funding through a microcredit loan scheme. However, to date there has been insufficient awareness and
interest from smallholder planters. Research conducted in Riau and South Kalimantan provinces found that smallholder borrowers were more
likely to borrow from traditional and informal sources than from the government programme. Using a gap analysis, this study identifies a number of fundamental problems caused by mismatches between the loan scheme and the characteristics of borrowers. They include a minimum
loan size that is too large for small farmers to manage, an overly burdensome application and reporting process, a lack of loan management at
the local level, and improper geographic targeting of the loan programme, among others. Based on these findings, this paper provides a number
of recommendations to improve the government loan scheme by adapting it to the needs of its target beneficiaries.
Keywords: timber plantations, Indonesia, smallholder farmers, financing, micro credit
Le financement des petites plantations de bois en Indonésie:inadéquation entre les caractéristiques des dispositifs de prêt et les attitudes des petits exploitants face à l’emprunt
B. NUGROHO, A. DERMAWAN et L. PUTZEL
Au cours des dix dernières années, de nombreux gouvernements dans les pays tropicaux ont encouragé la plantation de bois par les petits
exploitants. En Indonésie, les pouvoirs publics ont ainsi lancé un programme visant à établir 5,4 millions d’hectares de petites plantations de
bois d’ici à 2016. Afin d’accompagner ce programme, le gouvernement indonésien met à la disposition des petits planteurs un dispositif de
financement par le microcrédit. Mais à l’heure actuelle, les petits exploitants ne sont pas bien informés de son existence ou ne manifestent pas
un grand intérêt pour ce dispositif. Des recherches menées dans les provinces de Riau et de Kalimantan du Sud ont découvert que les petits
planteurs souhaitant emprunter étaient plus enclins à recourir à des ressources plus traditionnelles et informelles qu’au programme public.
À partir d’une analyse d’écart, cette étude met en évidence plusieurs problèmes fondamentaux qui découlent de l’inadéquation existant entre
le dispositif de prêt et les attitudes des emprunteurs. Parmi ces problèmes figurent entre autres le montant minimal du crédit accordé, trop
important pour être maîtrisé par les petits exploitants, des formalités de demande et d’information trop lourdes, l’absence d’administration
locale des prêts, ainsi que le ciblage géographique inadapté du dispositif. Cet article s’appuie sur ces résultats pour fournir un certain nombre
de recommandations qui permettraient d’améliorer le dispositif public de prêt en l’adaptant aux besoins des bénéficiaires ciblés.
Financiamiento de plantación de árboles maderables por parte de pequeños agricultores en
Indonesia: Discrepancias entre los atributos de los planes de préstamo y las características de
los pequeños prestatarios
B. NUGROHO, A. DERMAWAN y L. PUTZEL
En la última década, los gobiernos de muchos países tropicales han promovido la plantación de árboles maderables por parte de pequeños
agricultores. En Indonesia, el Gobierno introdujo un programa destinado a que pequeños agricultores plantaran 5,4 millones de hectáreas de
árboles maderables para el 2016. Para apoyar el programa, el Gobierno de Indonesia facilita el acceso a financiamiento mediante un plan de
microcréditos. No obstante, hasta la fecha ha habido escaso conocimiento e interés por parte de los pequeños plantadores. La investigación
realizada en las provincias de Riau y Kalimantan del Sur descubrió que era más probable que los pequeños prestatarios recurrieran para los
préstamos a fuentes tradicionales e informales que al programa gubernamental. Por medio de un análisis de diferencias, este estudio identifica
500
B. Nugroho et al.
varios problemas fundamentales causados por discrepancias entre el plan de préstamos y las características de los prestatarios. Los problemas
detectados incluyen, entre otros, una suma mínima de préstamo demasiado alta para ser gestionada por los pequeños agricultores, un proceso
de solicitud e informes demasiado costoso, falta de gestión del préstamo a nivel local y un objetivo geográfico inadecuado del programa de
préstamos. Basándose en estos resultados, este documento presenta varias recomendaciones para mejorar el plan de préstamos del Gobierno,
adaptándolo a las necesidades de los beneficiarios a los que está destinado.
INTRODUCTION
Over the last decade, governments in Southeast Asia have
been increasingly promoting community and smallholder
timber plantations. For example, in 1998, the Government
of Vietnam established the 5-million hectare reforestation
program with the goal of increasing forest cover to 43% by
2010 (De Jong et al. 2006). Similarly, smallholder timber
planting has become an important component in the Forest
Investment Program under development in Laos, to help
the country to reach 70% forest cover by 2020 (Lao People
Democratic Republic 2011). The program aims to improve
smallholder livelihoods and provide raw materials to foster
the development of forest industries.
In 2007, the Government of Indonesia established its
ambitious Smallholder Timber Plantation programme (Hutan
Tanaman Rakyat, or HTR). The programme aims to use state
production forests to provide additional supplies of plantation
timber to forest industries, while improving the livelihoods of
people living in and around degraded production forest areas.
The programme targeted 5.4 million ha of forests for allocation to smallholders for timber plantations by 2010, all of
which are supposed to be fully planted by 2016 (Obidzinski
and Dermawan 2010).
To stimulate the adoption of the programme, the government provides access to microcredit financing to HTR holders
through a loan scheme. The scheme is designed in such a
way that it is more flexible than the loan scheme provided by
government for large scale timber plantation concessions.
The government has allocated IDR 43 trillion (approximately
US$ 4.5 billion at the exchange rate of IDR 9,500 per USD)
from its Reforestation Fund to support this programme
(Obidzinski and Dermawan 2010). By January 2010, IDR 2
trillion (USD 210 million) had been made available for the
revolving fund (Berita Sore Online 2010).
To implement the scheme, the Government of Indonesia
established a public service unit called Forest Development
Funding Center (Pusat Pembiayaan Pembangunan Hutan,
PPPH). PPPH provides loans at interest rates corresponding
to those set by the Indonesian Deposit Insurance Corporation
(Lembaga Penjamin Simpanan, LPS), which are lower than
commercial rates. HTR holders will have an 8-year grace
period before they have to start repayment of the loan to PPPH
(Obidzinski and Dermawan 2010).
Unlike other lenders, the PPPH does not require collateral
in the form of land or vehicle ownership. Rather, the scheme
uses plantation yield estimates as collateral. The standard cost
is set through Ministry of Forestry regulation, which ranges
from Rp 8.6 million per ha to Rp 11.9 million per ha. The
loan is disbursed in tranches depending on the stage of HTR
development.
For obtaining HTR Loan, the households should form
a farmer group of at least five members, with each member
possessing an area of 8 to 15 ha and thus entitled to access
between Rp 69 million to 179 million per member based on
the standard cost range. Farmer groups should be registered
by the Head of Village and introduced to the Head of District
Forestry Service. The farmer groups should obtain assistance
from an extension agent (facilitator) appointed by the Head of
District (Bupati). While the procedures have been simplified
by the Ministry of Forestry compared to those applicable to
large scale timber plantations, the entire process of application for HTR permit and receipt of an HTR loan still involves
no less than 20 steps involving 9 different organizations
(Figure 1).
With the scheme set up by the government to open access
for smallholders for loan, however, the available funds for
the programme had not been completely distributed. Loan
disbursements from January to October 2012 reached only
IDR 7.2 billion (USD 760,000), or less than 1 per cent of the
targeted disbursement of IDR 745 billion (USD 78 million)
(Bisnis Indonesia 2012). Although a large amount of government financing was made available, smallholders were reluctant to access it. This is surprising because tree planting would
require financing particularly for land preparation and the
purchase of seedlings (Nurfatriani and Puspitojati 2002;
Siregar et al. 2007, Rohadi et al. 2010).
Against this background, the paper aims to analyse the
mismatches between the incentive structure provided through
the government financing scheme and the borrowing characteristics of Indonesian smallholders. Following an overview
of methods, the paper describes the financing sources in the
research location followed by a description of household
borrowing characteristics. Those characteristics are then analysed against the related elements of the incentive structure to
assess the mismatches, leading to the paper’s conclusions and
associated recommendations.
METHODS
Field research was conducted from November 2008 to April
2009 in Kuantan Singingi district (Riau) and Tanah Laut
district (South Kalimantan). Data on formal funding sources
available to the rural community was obtained through key
informant interviews with representatives of national and
provincial banks, including Bank Rakyat Indonesia (BRI) and
Bank Pembangunan Daerah (BPD) and representatives of
non-bank financial institutions such as Village Cooperatives,
National Program on Community Empowerment (Program
Financing smallholder timber planting in Indonesia
501
FIGURE 1 Application and disbursement mechanisms of the HTR loan scheme
Source: Head of the PPPH Decree No. 01/Pusat P2H-1/2008
Notes:
PPPH: Pusat Pembiayaan Pembangunan Hutan (Forest Development Funding Center); BPPHP: Badan Pemantauan Pemanfaatan Hutan
Produksi (Agency for Monitoring Production Forest Utilization); IUPHHK-HTR: Ijin Usaha Pemanfatan Hasil Hutan Kayu-Hutan Tanaman
Rakyat (HTR permit); RKU: Rencana Kerja Usaha (General Work Plan, for planting and harvesting); RKT: Rencana Kerja Tahunan (Annual
Work Plan, for planting and harvesting); CC: carbon copy.
Nasional Pemberdayaan Masyarakat, PNPM) in both locations. PNPM is a national program that is aimed at developing
community-based poverty eradication activities. A representative of LPS in each district was also interviewed.
In Kuantan Singingi, household surveys were carried out
in Lubuk Kebun, Situgal and Rambahan villages. In South
Kalimantan, the surveys were carried out in Ranggang
and Asem Jaya villages. The research sites were chosen on
the basis of: (1) the presence of timber processing companies
including wood workers in South Kalimantan and pulp
manufacturers in Riau; (2) the active engagement of community members in tree planting; and (3) evidence that the
district government had promoted the HTR programme.
Household surveys were carried out to understand the
characteristics of households and their credit experience
using a structured questionnaire-based interview. In South
Kalimantan, 179 respondents were randomly selected,
consisting of 112 respondents who had experience in borrowing and 67 respondents with no experience in borrowing.
In Riau, 101 respondents were randomly selected, including
48 respondents who had borrowing experience and 53 who
did not.
A gap analysiswas conducted (e.g. Davis et al. 2002;
MacQueen et al. 2009) to understand the mismatches between
selected attributes of the loan scheme and relevant characteristics of target groups. The parameters of the analysis
included: 1) loan basis and amount, 2) experience in the
activities being financed, 3) distance to the loan source,
4) requirement of collateral and penalty for outstanding loan,
5) ease in obtaining credit and administration cost, 6) requirement to form farmer group, and 7) effectiveness of repayment
collection by credit officers. Mismatches identified through
the gap analysis are synthesised as a basis to provide
recommendations.
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B. Nugroho et al.
RURAL FINANCING SOURCES
The development of forest plantations can bring many
benefits. Plantation forests produce large amounts of timber
in addition to social, economic, and environmental benefits
(Cossalter and Pye-Smith 2003). Rural financing for community-based forests may increase local community participation in forest management, provision of livelihood from
the forestry sector, and poverty alleviation (Gondo 2009).
However, not all types of financing institutions are willing to
assume the risks associated with plantation forestry.
In Indonesia, rural financing sources can be categorized
into four broad groups, namely (1) formal bank financial
institutions (BFI); (2) formal non-bank financial institutions
(NBFI); (3) traditional financing sources; and (4) informal
financing sources. The BFIs activein the research locations
are BPD and BRI. NBFIs encountered in the research locations were the Mitra Sejati Village Cooperative in Riau and
Tani Jaya Murni Village Cooperative in South Kalimantan;
and PNPM (Program Nasional Pemberdayaan Masyarakat)
Mandiri in both locations. PNPM is a national program that is
aimed at developing community-based poverty eradication
activities.
Traditional financing sources include community structures known as arisan and julo-julo. Arisan, found in both
Riau and South Kalimantan, are rotating community saving
groups where each member receives a sum of money after a
monthly draw to determine the next recipient. Julo-julo, found
only in Riau, is similar to arisan, but the schedule for each
participant’s turn to use the fund is determined at the beginning by drawing lots, so the schedule and the turn for each
participant to use the money is known from the beginning.
In addition to these community structures, relatives and
neighbours also often provide start up investment funds for
plantation establishment.
Meanwhile, informal financing sources are institutions
whose existence is legally acknowledged, but not as formal
financing institutions according to existing laws and regulations, for example non government organizations (NGO) that
provide low interest loans in some areas in Indonesia (Usman
et al. 2004). This type of financing source, however, is not
available in both research locations.
To BFIs and NBFIs, the HTR program and indeed forestry
in general are not considered attractive investment opportunities. From the in-depth interviews conducted with representatives of BRI, BPD and PT Askrindo, it can be generalized that
these institutions are not interested in providing financing
to the forestry sector. Reasons cited for this lack of interest
include the following: (1) forest plantations are at high risk of
attack from pests, diseases and fire, especially if there is no
guidance from technical service agency and bank in plantation management; (2) if the debtors rely solely on income
from the yield of the timber plantations, the incidence of
non performing loan will be high; (3) credit from government
programmes is often perceived as grant funding which
does not need to be returned, which decreases the level
of caution of the bank in distributing the credit, resulting
in high rates of non performing loans; (4) non performing
loans negatively affect the performance of the bank’s portfolio; (5) there is no open market for timber; and (6) the possibility that the price of timber may fall at any time is very
high due to over-supply of timber (7) specifically for NBFI,
government credit programmes (such as PNPM) are implemented over a short period. PNPM is seen as a success in
terms of providing soft loans for communities (Akatiga 2010).
However, because of the length of the rotation cycle between
planting and harvest, timber plantations are not eligible for
this type of financing. On the other hand, traditional and
informal sources of funding generally do not require certain
commodities as a basis for financing decision. Households
who get the draw from arisan or julo-julo can use the money
without any conditions. However, the amount of money that
is involved in these systems is generally very small.
CHARACTERISTICS OF HOUSEHOLDS AND
PERCEPTIONS OF LOAN
The goal of a microcredit program transcends the businessoriented aspects of investment and specifically targets
improved livelihoods for loan recipients (Yunus 2007). In
order to achieve livelihood improvement, the household characteristics and borrowing behaviours of target groups need to
be well understood. The results of household surveys conducted bring insights on these characteristics and behaviour
summarized below.
Characteristics of households
Table 1 summarizes the household characteristics in Riau and
South Kalimantan. In Riau, 53 respondents (53%) were 30–
49 years old, 24% were 50 years or older, and the remaining
24% were under 30 years old. Their education level was dominated by primary and junior high school (63%), yet 28% did
not complete primary school education. In terms of livelihood, most were farmers (77%), with the household generally
(89%) own assets (excluding house, land and savings) with
the value of less than Rp 20 million.
In South Kalimantan, 58% of respondents were aged of
30–49 years, 35% were 50 years or older, and 7% less than 30
years. Education level was dominated by primary and junior
high school (78%), but there were only 5% who did not completethe primary school education. Again, more than half
of the respondents were farmers (54%) with the household
generally (57%) holding not more than Rp 20 million.
Experience in borrowing money
Table 2 summarizes the respondents’ experience in borrowing
money. About 48% of the households in Riau and 63% in
South Kalimantan had experience in borrowing money. However, most of those who had experience only borrowedless
than Rp 1 million per year (96% of respondents in Riau
and 70% in South Kalimantan). The purposes of borrowing
included consumption (75% in Riau and 29% in South Kalimantan) and capital for agriculture (51% in East Kalimantan),
as well as other needs including healthcare, child education
and social activities.
Financing smallholder timber planting in Indonesia
TABLE 1 Household characteristics in Riau and South
Kalimantan
Riau
South Kalimantan
n
%
n
%
<30
24
24
12
7
30–39
29
29
38
21
Age
40–49
24
24
67
37
50–
24
24
62
35
Total
101
100
179
100
No schooling
28
28
9
5
Elementary
51
50
109
61
Junior High School
12
12
30
17
Education
Senior High School
8
8
18
10
Sarjana/Diploma
2
2
6
3
Others
0
0
7
4
101
100
179
100
77
76
96
54
Government employee
6
6
9
5
Private sector
employee
0
0
8
5
Daily-paid worker
0
0
11
6
Agricultural laborer
9
9
1
1
Housewife
5
5
26
14
Entrepreneur
0
0
15
8
Others
4
4
13
7
101
100
179
100
89
88
103
57
20–<40 million
5
5
50
28
40–<60 million
2
2
12
7
60 million –
5
5
14
8
101
100
179
100
Total
Occupation of respondents
Farmer
Total
Assets (excluding house and land)
< 20 million
Total
Source: household surveys
The most common sources of loans were informal, including from rural entrepreneurs (63% in Riau and 12% in South
Kalimantan); and relatives and neighbours (29% in Riau and
24% in South Kalimantan. None of the respondents in Riau
ever borrowed from banks or government credit programs.
In South Kalimantan, 14% of respondents had previously borrowed from banks and 13% from government credit programs.
The distances to the loan sources were generally short, mostly
less than 5 km (92% of respondents in Riau and 78% in South
503
Kalimantan). This reliance on informal loan sources means
that collateral is not an absolute requirement for obtaining
the loan: 38% of respondents in Riau and 78% in South Kalimantan stated that loans obtained did not require collateral.
Generally speaking, all respondents in Riau and 96% in South
Kalimantan perceived borrowing to be “easy”.
Preliminary perceptions of the HTR loan scheme
In the study areas, the HTR loan scheme had not been
adequately promoted. In Riau only 11% of the respondents
had heard about the scheme from the Forestry Service Agency
of Kuantan Singingi district, whereas the remaining 89%
of respondents had never heard about the scheme. In South
Kalimantan, 100% of respondents had never heard about
the scheme, while some of the staff of the Forestry Service
Agency explained that they had never read or heard about
the HTR programme, let alone the HTR loan scheme. This
situation obliged the interviewer to first describe the HTR
programme and the loan scheme to respondents, to make the
interview run smoothly. After this explanation, it became
clear that the HTR loan scheme is not interesting to respondents. About 81% of respondents in Riau and 79% of respondents in South Kalimantan said that they were not interested
in HTR Loan (Table 3). The reasons for this were fear of the
complicated application procedure and high interest rate (82%
of respondents in Riau and 88% in South Kalimantan), fear of
not being able to repay the loan (18% in Riau and 8% in South
Kalimantan), and fear of being burdened with more financial
problems in the household (3%).
Experience in plantation forestry
From focus group discussions (FGDs), we found that in Riau,
people complained of negative experiences with prior forestry
financing programmes. These included the Business Credit
for Private Forest (Kredit Usaha Hutan Rakyat, KUHR) and
Credit of Farming Business of Watershed Conservation
(Kredit Usahatani Konservasi Daerah Aliran Sungai,
KUK-DAS) programmes which provided financing for tree
planting. However, the eventual market for the timber
produced was extremely poor and growers failed to sell their
timber or obtained a very low price. Similarly, in South
Kalimantan, there was a co-operation with one timber
company for planting jabon (Anthocephalus cadamba). At
the end, however, the farmers abandoned the programme
because the timber company went bankrupt and disappeared,
and the trees could not be sold.
However, in South Kalimantan there was an ongoing
partnership with a company to plant mahogany (Swietenia
spp.) and acacia (Acacia mangium), on lands belonging
to a large-scale timber plantation concession, an estate crop
concession as well as to the community, under the facilitation
of the Head of Forestry Office of Tanah Laut district. The
partnership model can be characterised as production sharing.
There were three types of partnership, namely (1) between an
HTI company and the communities to plant Acacia mangium
on the communities’ land or in timber plantations concession
area which was claimed by the communities; (2) between an
estate crop company and the communities to plant mahogany;
504
B. Nugroho et al.
TABLE 2 Experience of household survey respondents in borrowing money
Issue
Prior experience in borrowing
Yes
No
Total
Amount of money borrowed
≤ Rp 500,000
> Rp 500,000–Rp 1,000,000
> Rp 1,000,000–Rp 2,000,000
> Rp 2,000,000–Rp 5,000,000
> Rp 5,000,000
Total
Purpose of the loan
Working capital
Consumption
Transport
Housing
Healthcare
Education
Social purposes
Total
Source of loan
Bank
Credit program from government
Cooperatives
Rural entrepreneurs
Saving and loan association
Family/friends
Total
Distance to the souce of loan
≤ 5 km
> 5–10 km
> 10–15 km
> 15 km
Total
Collateral
Land certificate
Moveable goods (incl. motorbikes and cars)
Immovable goods
Appointment letter
No collateral
Total
Facility of access to loans
Easy
Difficult
Total
Source: household surveys
Riau
South Kalimantan
n
%
n
%
48
53
101
48
52
100
112
67
179
44
2
1
1
0
48
92
4
2
2
0
100
1
36
1
0
1
4
5
48
Total
n
%
63
37
100
160
120
280
57
43
100
50
28
16
10
8
112
45
25
14
9
7
100
94
30
17
11
8
160
59
19
11
7
5
100
2
75
2
0
2
8
10
100
57
33
4
2
6
5
5
112
51
29
4
2
5
4
4
100
58
69
5
2
7
9
10
160
36
43
3
1
4
6
6
100
0
0
3
30
1
14
48
0
0
6
63
2
29
100
16
14
10
13
32
27
112
14
13
9
12
29
24
100
16
14
13
43
33
41
160
10
9
8
27
21
26
100
44
1
3
0
48
92
2
6
0
100
87
10
12
3
112
78
9
11
3
100
131
11
15
3
160
82
7
9
2
100
0
0
30
0
18
48
0
0
63
0
38
100
14
5
5
1
87
112
13
4
4
1
78
100
14
5
35
1
105
160
9
3
22
1
66
100
48
0
48
100
0
100
108
4
112
96
4
100
156
4
160
98
3
100
Financing smallholder timber planting in Indonesia
505
TABLE 3 Perceptions of the HTR loan scheme
Issue
Riau
n
South Kalimantan
%
n
%
Total
n
%
Interest in the HTR loan scheme
Interested
9
19
24
21
33
21
Not interested
39
81
88
79
127
79
Total
48
100
112
100
160
100
Working capital
8
89
21
88
29
88
Consumption
1
11
3
13
4
12
Transport
0
0
0
0
0
0
Housing
0
0
0
0
0
0
Healthcare
0
0
0
0
0
0
Education
0
0
0
0
0
0
Social purposes
0
0
0
0
0
0
Total
9
100
24
100
33
100
Fear of not being able to repay
7
18
7
8
14
11
No need of a loan
0
0
0
0
0
0
Fear of creating another problem
0
0
4
5
4
3
Plan for the use of HTR loan
Reasons for lack of interested in the HTR loan
Others (complex procedures)
32
82
77
88
109
86
Total
39
100
88
100
127
100
Source: household surveys
and (3) between one timber company in Surabaya (East Java
Province) and community members who participated in
the National Movement of Land and Forest Rehabilitation
(Gerakan Nasional Rehabilitasi Hutan dan Lahan, GNRHL)
programme by planting mahogany trees on the communities’
lands. In Riau, partnerships between companies and communities are generally in the form of land rental. Large scale
timber plantation concessions provide seedlings and sometimes labour on community lands. Communities then receive
a share of the profits from the partnership scheme (Moeliono
et al. 2010).
GAP ANALYSIS OF HTR LOAN POLICY IN
RELATION TO SMALLHOLDER CHARACTERISTICS
AND NEEDS
The result of the gap analysis assessing the mismatches
between the HTR loan policy and the characteristics of
borrowers is summarized below. The elements being analysed
consist offactors that influence the efficacy and efficiency of
loan distribution. If these are grouped, there are seven aspects
relevant to the HTR loan policy. Based on the juxtaposition
of the loan scheme attributes and the relevant target group
characteristics, we arrive at the following analysis and
implications.
Loan basis and amount: A single one-size-fits-all scheme
narrows the choices for farmers. In addition, a fixed amount
that is too large for individual farmers to repay is not adapted
to the demographic features of the beneficiaries in our study
areas. For this reason, farmers are likely to be left out and
the credit enjoyed more by co-operatives and other legal
entities.
The implications of this finding are that the scheme should
be made more flexible and variable, in terms of amount as
well as in its basic conditions. For example, a scheme might
better suit individual farmers if it targeted longer growing
cycles to increase volume and quality of wood rather than
simply promoting plantation development by area. In addition, cooperatives should be more carefully assessed to ensure
that they operate for their members’ welfare.
A credit scheme granted for delayed timber harvesting
toward increasing yield has been implemented in the subdistrict of Bawang, Batang district, Central Java by a private
timber processing company, PT Sumber Graha Sejahtera
(Prihadi 2010). This scheme is a credit facility for farmers
who need urgent financing (such as expenditure for education, healthcare, wedding party), but whose trees are not yet
mature (< 5 years). With this credit, farmers can delay their
harvest from between 0.5 to 2 years to achieve a higher yield.
It is in the interest of private companies to provide such
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B. Nugroho et al.
credit to ensure higher volumes and better quality timber in
the future.
Business experience of smallholder planters: Forest farmers outside of Java face problems marketing their wood. It is
rather different in Java, where in each village there are intermediary traders willing to purchase logs from the farmers,
and even many timber companies from outside Java invest
in centres of smallholder forests in Java (e.g. in Wonosobo).
Vertical integration in large-scale timber industry has the risk
of distorting log price. In Java, the price of common timbers
such as sengon (Paraserianthes falcataria) and plantation
Acacia species ranged from USD 59 to USD 118, or from
Rp 500 000 to Rp 1 million per m3, while in Riau they were
only about US$ 12 per tonne or Rp 122 000 per m3 (assuming
1 US$ is equivalent to Rp 8500, and 1 tonne is equivalent to
1.2 m3).
The implication of this large price discrepancy is that the
Ministry of Forestry should choose prioritized districts as the
centre of HTR to make the area more attractive to industrial
timber processors to promote investment in the area, rather
than to roll out the scheme over a broader geographic region.
The effect of vertical integration created by large scale timber
plantations and associated pulp and paper industries, which
have occurred for a long time, need to be assessed in terms of
their role in distorting log prices.
Distance to the loan source: PPPH, the only agency
legally able to arrange application and distribution of loans
for HTR program, is located in Jakarta. Without developing
organization at the site level in order to be closer to the target
groups, the distribution of HTR loan is vulnerable to mistargeting. Thus, the PPPH needs to analyse the possibility of
developing a Programme Management Unit (PMU) close to
the target group. There is a need for prioritization of strategic
location for HTR development.
Requirement of collateral and penalty for late repayment
of loan: The acceptance of the plantations as collateral
supported by a letter declaring joint responsibility of members in farmers groups or cooperatives was developed in conformity with stakeholders’ requirements. These conditions
are adapted to group ownership of plantations, and are not
well adapted to individual ownership.
If the HTR permit could be designed in such a way that it
can be valuable to the holder, then the HTR licence could be
made as collateral to ensure loan repayment according to a
prescribed schedule and total amount.
Ease in obtaining credit and administration cost: Some
of the respondents in South Kalimantan had experience in
borrowing from PNPM. One of the reasons they were willing
to access PNPM is because the field officers of PNPM
actively visit them, and because there is a PMU in each
subdistrict to bring information, technical assistance and to
support financial management. In contrast, the HTR loan is
complicated to obtain and to distribute as well as to manage.
In part, this is due to the fact that the HTR system has no
mechanism for reducing the asymmetry of information that
puts farmers at a disadvantage. The system is both complicated and opaque, which increases transaction costs, and
increases the risk of loan mis-targeting.
These problems could potentially be alleviated by the
creation of PMUs near communities, which would reduce
transaction costs to farmers, while minimizing the problem of
asymmetric information. Fees associated with provision and
handling of HTR loans should be borne by the government to
increase the attractiveness of the programme.
Farmer group formation and extension services: The
presence of facilitators is strategic, particularly those who
have experience in community-level work. Their presence is
not only for giving technical and administrative guidance, but
also stimulating collective actions such as mutual help and
trust building. Mutual help could reduce the dependence on
funding from outside. If land preparation and planting could
be conducted with the system of arisan (where on a particular
day, farmers work together for land preparation and planting
in land area of farmer A, and in the next day in that of farmer
B, and so on) then in practical terms, the money needed is
only for planting stocks and meals.
To improve group formation, facilitation is recommended
to fulfil the following: (1) determination of optimum size of
group; (2) preparation of farmer group rules; (3) provision
of technical and administrative guidance; (4) guidance on the
management of HTR loan funds; (5) creation of networks
with various market actors, technical support and other agents;
and (6) supply of information. In addition to creating new
facilitation infrastructures, strengthening the capacity of
existing facilitators/extension agents is needed.
Effectiveness of repayment collection by credit officers:
Because of the absence of a PMU, there exists a perception
that the borrowed money from HTR loan does not belong to
anyone (these are “nobody’s funds”). This raises the notion
that credit from government does not need to be returned,
which was the experience of the banks distributing other credit programmes. Therefore the PMU should be organized under PPPH to increase the smallholders’ capacity to carry out
tree planting. It could also be used as an organization of the
PPPH at the site level, responsible for smooth repayment of
the loans. In addition, to allocate and share the risk, there is a
need to study the possibility to repositioning the PPPH as a
guarantor of the loans, whereas banks would act as the loan
provider.
CONCLUSION AND RECOMMENDATIONS
There are many sources of financing for poor people, in the
form of bank financial institutions and non-bank financial
institutions, as well as from traditional and informal sources.
However, these lenders do not have incentives to finance
smallholder plantation forestry. The HTR loan scheme
launched by the Indonesian Ministry of Forestry was conceived to provide an alternative source of credit. However,
the credit scheme was not promoted widely and also has not
proven sufficiently attractive to forest farmers, so the available funds have not been completely distributed. Some
of the shortcomings of the scheme include the following:
1. The scheme reduces the options for farmers to borrow
money in a flexible manner which could serve other
purposes, as this scheme only provides loans using
standard costs solely for plantation development;
Financing smallholder timber planting in Indonesia
2. Farmers in outside Java have bad experiences in past
projects in forestry financing and have been facing
problems in marketing their timber due to vertical
integration of large scale industries;
3. The existing agency managing the HTR loan is far
from smallholders;
4. The complexity of the application procedure thwarts
smallholders’ participation by increasing transaction
costs;
5. Without facilitation or local Programme Management
Units the development of HTR is likely to fail and
farmers who do borrow are likely to be entangled by
debts; and
6. Although the timber pricing policy is beyond the HTR
loan policies, the units of the relevant Governments
need to ensure that the price of timber is attractive for
the farmers and able to generate farmers’ income that
can guarantee the repayment of a loan.
The lack of credit distribution seems to have been caused
by mismatches between the credit scheme and the attributes
of the borrowing characteristics of forest farmers. Therefore,
there is a need to harmonize the policy and the characteristics
of households which constitute the target of HTR loan,
including their borrowing behaviour. This study recommends
improvement in HTR loan institutions – specifically, (1) making the loan basis and amount more flexible in accordance
with the households’ ability to repay; (2) simplification of the
application procedure, financial reporting, and the repayment
mechanism; (3) the attractiveness of the business through
in-depth analysis of plant species being promoted/allowed;
(4) organizational arrangement of PPPH, most importantly
creating a local PMU to provide information, extension and
oversight of repayments, among other functions; (5) prioritization of districts (regencies) as centres of HTR; (6) guarantee of payment (including potentially using HTR permits,
which should be made transferable, as collateral); and (7)
expansion of the availability and increased capacity of facilitators/extension agents. In addition, (8) the scheme should
incentivize delayed timber harvesting, i.e. longer rotation
cycles that produce higher yields and quality of logs and also
support the development of markets and stabilization of
timber prices. The latter requires attention to the potential
price effects of vertical integration. Finally, cooperatives
need to be assessed to ensure that they are in reality collective
businesses of smallholders for community welfare to avoid
mis-targeting of funds.
ACKNOWLEDGMENT
This paper was prepared as part of the collaborative research
project ‘Strengthening Rural Institutions to Support Livelihood Security for Smallholders Involved in Industrial Treeplanting Programs in Vietnam and Indonesia’, financed
by Grant No. 07.7860.5–001.11 from Deutsche Gesellschaft
für Internationale Zusammenarbeit (GIZ) on behalf of the
government of the Federal Republic of Germany’s Federal
507
Ministry for Economic Cooperation and Development (BMZ).
It is a collaborative research programme between the Center
for International Forestry Research (CIFOR); Center for
Tropical and Subtropical Agriculture and Forestry, GeorgAugust-Universität Göttingen (CeTSAF), Germany; University of East Anglia, UK; Faculty of Forestry, Institut Pertanian
Bogor (IPB), Indonesia; and the Forest Science Institute of
Vietnam (FSIV). The authors would also like to thank five
anonymous reviewers.
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